Joint Ventures Involving Tax-Exempt Organizations, 2018 Cumulative Supplement E-Book

Michael I. Sanders

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 367

Veröffentlichungsjahr: 2018

Beschreibung

Effective strategies for non-profit entities in a profit-based world Joint Ventures Involving Tax-Exempt Organizations examines the procedures, rules, and regulations surrounding joint ventures and partnerships, emphasizing tax-exempt status preservation. Revised and updated to align with current 2017 Tax Act, this supplement offers expert interpretation and practical guidance to professionals seeking a complete reference, including an analysis of impact of the "siloing" of the UBIT rules, the new Opportunity Zone Funds which will incentivize investors in designated census tracts, inter alia. Sample documents enable quick reference and demonstrate real-world application of new laws and guidelines. The discussion delves into planning strategies that can be applied to joint ventures and partnerships while maintaining tax-exempt status, and which joint ventures are best suited for a particular organization. Widely accepted business strategies for profit-based entities, joint ventures, partnerships, and alliances are increasingly being used by nonprofits in need of additional financial support in challenging economic environments. This book provides invaluable guidance to appropriate planning and structuring while complying with tax-exemption guidelines. * Identify the most appropriate transactions for nonprofit organizations * Recognize potential problems stemming from debt restructuring and asset protection plans * Reference charitable organization, partnerships, and joint venture taxation guidelines * Understand which joint venture configurations are best suited to tax-exempt organizations Joint ventures and partnerships are currently employed by a variety of not-for-profit organizations while maintaining their tax-exempt status. Hospitals, research laboratories, colleges and universities, charter and special-needs schools, low-income housing developments, and many others are reaping the benefits of joint venture participation--but without careful planning and accurate interpretation of current laws, these benefits can be erased by loss of tax-exempt status. Joint Ventures Involving Tax-Exempt Organizations provides practical, up-to-date guidance on realizing the full benefits and avoiding the hazards unique to nonprofit organizations.

Leseprobe

Table of Contents

Cover

Preface

Acknowledgments

CHAPTER 1: Introduction: Joint Ventures Involving Exempt Organizations

§ 1.4 UNIVERSITY JOINT VENTURES

§ 1.5 LOW-INCOME HOUSING AND NEW MARKETS TAX CREDIT JOINT VENTURES

§ 1.6 CONSERVATION JOINT VENTURES

§ 1.8 REV. RUL. 98-15 AND JOINT VENTURE STRUCTURE (NEW)

§ 1.10 ANCILLARY JOINT VENTURES: REV. RUL. 2004-51

§ 1.14 THE EXEMPT ORGANIZATION AS A LENDER OR GROUND LESSOR

§ 1.15 PARTNERSHIP TAXATION

§ 1.17 USE OF A SUBSIDIARY AS A PARTICIPANT IN A JOINT VENTURE

§ 1.22 LIMITATION ON PRIVATE FOUNDATION'S ACTIVITIES THAT LIMIT EXCESS BUSINESS HOLDINGS

§ 1.24 OTHER DEVELOPMENTS

CHAPTER 2: Taxation of Charitable Organizations

§ 2.1 INTRODUCTION (REVISED)

§ 2.2 CATEGORIES OF EXEMPT ORGANIZATIONS

§ 2.3 § 501(C)(3) ORGANIZATIONS: STATUTORY REQUIREMENTS (REVISED)

§ 2.6 APPLICATION FOR EXEMPTION (REVISED)

§ 2.7 GOVERNANCE (REVISED)

§ 2.8 FORM 990: REPORTING AND DISCLOSURE REQUIREMENTS

§ 2.10 THE IRS AUDIT

§ 2.11 CHARITABLE CONTRIBUTIONS

NOTES

CHAPTER 3: Taxation of Partnerships and Joint Ventures

§ 3.1 SCOPE OF CHAPTER (NEW)

§ 3.3 CLASSIFICATION AS A PARTNERSHIP

§ 3.4 ALTERNATIVES TO PARTNERSHIPS

§ 3.7 FORMATION OF PARTNERSHIP (NEW)

§ 3.8 TAX BASIS IN PARTNERSHIP INTEREST (REVISED)

§ 3.9 PARTNERSHIP OPERATIONS

§ 3.11 SALE OR OTHER DISPOSITION OF ASSETS OR INTERESTS (REVISED)

§ 3.12 OTHER TAX ISSUES (REVISED)

NOTES

CHAPTER 4: Overview: Joint Ventures Involving Exempt Organizations

§ 4.1 INTRODUCTION (NEW)

§ 4.2 EXEMPT ORGANIZATION AS GENERAL PARTNER: A HISTORICAL PERSPECTIVE (REVISED)

§ 4.6 REVENUE RULING 2004-51 AND ANCILLARY JOINT VENTURES

§ 4.9 CONVERSIONS FROM EXEMPT TO FOR-PROFIT AND FROM FOR-PROFIT TO EXEMPT ENTITIES

§ 4.10 ANALYSIS OF A VIRTUAL JOINT VENTURE

CHAPTER 5: Private Benefit, Private Inurement, and Excess Benefit Transactions

§ 5.1 WHAT ARE PRIVATE INUREMENT AND PRIVATE BENEFIT?

§ 5.2 TRANSACTIONS IN WHICH PRIVATE BENEFIT OR INUREMENT MAY OCCUR

§ 5.3 PROFIT-MAKING ACTIVITIES AS INDICIA OF NONEXEMPT PURPOSE

§ 5.4 INTERMEDIATE SANCTIONS (REVISED)

§ 5.7 STATE ACTIVITY WITH RESPECT TO INSIDER TRANSACTIONS

NOTES

CHAPTER 6: Engaging in a Joint Venture: The Choices

§ 6.1 INTRODUCTION (NEW)

§ 6.2 LLCs

§ 6.3 USE OF A FOR-PROFIT SUBSIDIARY AS PARTICIPANT IN A JOINT VENTURE (REVISED)

§ 6.5 PRIVATE FOUNDATIONS AND PROGRAM-RELATED INVESTMENTS (REVISED)

§ 6.6 NONPROFITS AND BONDS

§ 6.7 EXPLORING ALTERNATIVE STRUCTURES

§ 6.8 OTHER APPROACHES (REVISED)

NOTES

CHAPTER 7: Exempt Organizations as Accommodating Parties in Tax Shelter Transactions

§ 7.2 PREVENTION OF ABUSIVE TAX SHELTERS

§ 7.3 EXCISE TAXES AND PENALTIES

NOTES

CHAPTER 8: The Unrelated Business Income Tax

§ 8.1 INTRODUCTION

§ 8.3 GENERAL RULE (REVISED)

§ 8.4 STATUTORY EXCEPTIONS TO UBIT (NEW)

§ 8.5 MODIFICATIONS TO UBIT (NEW)

§ 8.7 CALCULATION OF UBIT (NEW)

NOTES

CHAPTER 9: Debt-Financed Income

§ 9.1 INTRODUCTION

§ 9.2 DEBT-FINANCED PROPERTY (REVISED)

§ 9.6 THE FINAL REGULATIONS

NOTE

CHAPTER 10: Limitation on Excess Business Holdings

§ 10.1 INTRODUCTION

§ 10.2 EXCESS BUSINESS HOLDINGS: GENERAL RULES (REVISED)

§ 10.3 TAX IMPOSED

§ 10.4 EXCLUSIONS (REVISED)

NOTES

CHAPTER 12: Healthcare Entities in Joint Ventures

§ 12.1 OVERVIEW (NEW)

§ 12.2 CLASSIFICATIONS OF JOINT VENTURES

§ 12.3 TAX ANALYSIS (REVISED)

§ 12.4 OTHER HEALTHCARE INDUSTRY ISSUES

§ 12.5 PRESERVING THE 50/50 JOINT VENTURE (REVISED)

§ 12.9 GOVERNMENT SCRUTINY

§ 12.11 THE PATIENT PROTECTION AND AFFORDABLE CARE ACT OF 2010: § 501(R) AND OTHER STATUTORY CHANGES IMPACTING NONPROFIT HOSPITALS

§ 12.12 THE PATIENT PROTECTION AND AFFORDABLE CARE ACT OF 2010: ACOS AND CO-OPS: NEW JOINT VENTURE HEALTHCARE ENTITIES

NOTES

CHAPTER 13: Low-Income Housing, New Markets, Rehabilitation, and Other Tax Credit Programs

§ 13.3 LOW-INCOME HOUSING TAX CREDIT (REVISED)

§ 13.4 HISTORIC INVESTMENT TAX CREDIT

§ 13.6 NEW MARKETS TAX CREDITS (REVISED)

§ 13.10 THE ENERGY TAX CREDITS

§ 13.11 THE OPPORTUNITY ZONE FUNDS: NEW SECTION 1400Z-1 AND SECTION 1400Z-2 (NEW)

NOTES

CHAPTER 14: Joint Ventures with Universities

§ 14.1 INTRODUCTION (NEW)

§ 14.5 FACULTY PARTICIPATION IN RESEARCH JOINT VENTURES

§ 14.6 NONRESEARCH JOINT VENTURE ARRANGEMENTS

§ 14.7 MODES OF PARTICIPATION BY UNIVERSITIES IN JOINT VENTURES (REVISED)

NOTES

CHAPTER 15: Business Leagues Engaged in Joint Ventures

§ 15.1 OVERVIEW (REVISED)

§ 15.2 THE FIVE-PRONG TEST

§ 15.3 UNRELATED BUSINESS INCOME TAX

NOTES

CHAPTER 16: Conservation Organizations in Joint Ventures

§ 16.1 OVERVIEW

§ 16.2 CONSERVATION AND ENVIRONMENTAL PROTECTION AS A CHARITABLE OR EDUCATIONAL PURPOSE: PUBLIC AND PRIVATE BENEFIT (REVISED)

§ 16.3 CONSERVATION GIFTS AND § 170(H) CONTRIBUTIONS (REVISED)

§ 16.7 EMERGING ISSUES (REVISED)

NOTES

CHAPTER 17: International Joint Ventures

§ 17.5 GENERAL GRANTMAKING RULES

§ 17.11 APPLICATION OF FOREIGN TAX TREATIES (REVISED)

NOTES

CHAPTER 19: Debt Restructuring and Asset Protection Issues

§ 19.1 INTRODUCTION (NEW)

§ 19.2 OVERVIEW OF BANKRUPTCY (REVISED)

§ 19.3 THE ESTATE AND THE AUTOMATIC STAY (REVISED)

§ 19.4 CASE ADMINISTRATION (REVISED)

§ 19.5 CHAPTER 11 PLAN (REVISED)

§ 19.6 DISCHARGE (NEW)

NOTE

Index

End User License Agreement

Guide

Cover

Table of Contents

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E1

joint ventures involving tax-exempt organizations

2018 Cumulative Supplement

Fourth Edition

Michael I. Sanders

Copyright © 2019 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Cover Design: Wiley

Cover Image: ©iStock.com/Felix Mockel

To my wife, Judy, whose love, devotion, and patience has made this book possible; and to David, Patty, Hayley, and Jacob; Noah, Brooke, Emme, and Ryder Aaron; Adam, Randi, Gabby, and Eva; and Sammy, Rebecca, Benjamin and Jonah.

Preface

In almost 25 years since publication of the first edition of Joint Ventures, I've often expressed concern about the challenges confronting tax-exempt organizations in generating funds to conduct programs and activities that further their exempt purposes. Exploring the potential of increased revenue by participating in joint ventures was the genesis of this book. Unfortunately, after passage of The Tax Act of 2017 (Pub. L. No. 115-97) (the “Tax Act”), my concern, along with others in the nonprofit world, is heightened. As readers know by now, the 2017 tax bill made numerous changes to the Internal Revenue Code (the “Code”) that affect the sector in a negative way, and in a manner that suggests that tax cuts elsewhere in the Code are, in part, economically supported by new burdens on the nonprofit sector. The changes and their potential impact are described in this Supplement. There is a reduction in the corporate and individual tax rates, which will be beneficial to many, including nonprofits, which will benefit from a lower tax rate on UBIT, notwithstanding its expanded scope, discussed later. And the deduction for cash contributed to public charities is increased from 50% to 60%; the provision sunsets in 2025, and, as a result of some complex rules, cash contributions have the effect of reducing other contributions (new § 170(b)(1)(G)). On the other hand, it is anticipated that the increase in the estate tax exemption and the doubling of the standard deduction, in effect eliminating the deductibility of charitable contributions for many, may result in fewer charitable contributions. There are also budgetary restraints that will affect government agencies that often support charitable projects.

Moreover, the aforesaid expected revenue decrease will be compounded by the anticipated increases in taxes to be paid by exempt organizations stemming from several new Code provisions, including the new “siloing” UBIT rules disallowing the bundling of gains and losses from all UBIT activities but requiring instead the separate computation of gains and losses from each unrelated activity (new § 512(a)(6), a practice not required of for-profit entities); the new excise tax based on investment income of private colleges and universities (new § 4968); the excise tax on excess executive compensation (new IRC § 4960); and a UBIT tax on expenses associated with the provision of certain employee fringe benefits (§ 512(a)(7)). The latter tax is particularly unusual in that it imposes a tax not on revenue but on expenses incurred by applicable institutions.

On the other hand, the new opportunity zone legislation in the 2017 tax bill will incentivize individuals and corporate investors to invest in qualified census tracts that have been designated by state governors, thereby attracting companies to locate in such zones; and perhaps fund new technology and healthcare businesses as well.

There remain myriad questions among nonprofits and their representatives regarding interpretation of these rules; for instance, What constitutes separate businesses? How will expenses among them be allocated? Although the IRS added these two issues to its 2018 Priority Guidance Plan, there have been calls for a delay in implementation of the rules, which are effective for years after December 31, 2017, with debate as to IRS's authority to institute a delay. Alternatively, exempt organizations are requesting that no penalties be imposed until guidance is issued. There is a great deal of uncertainty, with some practitioners, including your author, recommending that a reasonable approach should be defensible in this interim period. In any event, we await IRS guidance and a revised Form 990, without certainty at this time as to when either will be forthcoming and what they will provide.

Some provisions, such as repeal of the so-called Johnson Amendment prohibiting § 501(c)(3)'s from participating in political activities and expansion of the intermediate sanctions under § 4958, were not included in the Tax Act but continue to be introduced in other legislation. Whether lawmakers are using this as a vehicle to garner votes from their constituencies or there is a sincere effort to overturn this decades old rules remain to be seen. Other modifications are being sought through new federal level legislation as well, including a repeal of the college and university investment income excise tax and a proposal to move charitable deductions to “above the line” as an incentive to taxpayers taking the new higher, standard deduction to continue making charitable contributions. In addition, high-tax states, such as New Jersey, Connecticut, and New York, have passed laws facilitating deductibility of charitable contributions, with California poised to do the same, despite IRS Notice 2018-54 stating that federal law governs characterization and deductibility questions.

Although the ultimate impact is not yet foreseeable, the Tax Act will lead to increased joint venture activity and structuring, including other related party structures. For example, if a nonprofit has several unrelated businesses that are deemed separate and therefore “siloed,” should those be “dropped” into one or more C corporations so that revenue from all can be offset by losses, thereby reducing the tax paid at the 21 percent rate? Or would a joint venture be suitable for certain activities in order to attract funds to support charitable projects? To fully take advantage of the new opportunity zone incentives, the IRS needs to issue additional guidance in view of the technical complexity that exists. And, in light of the reduced corporate tax rate, would a C corporation be an appropriate joint venture vehicle, as opposed to the traditional LLC? How do the changes to IRC § 163(j), limiting deductibility of net operating losses (NOLs) to 80 percent but with perpetual carryforwards, affect planning? Analysis of these issues will depend in great deal on future IRS guidelines and could be affected, and potentially upended, by future Code changes, such as tax rate increases if Congressional party leadership changes with subsequent elections.

In the 2018 additions to the Supplement in Chapter 2, there is an expanded discussion of the new 2017 tax legislation with an examination of the technical details, which are also discussed in other chapters, including the Taxation of Partnerships and Joint Ventures, Unrelated Business Income Tax, Healthcare Entities in Joint Ventures, Opportunity Zone Fund, and Joint Ventures with Universities. There is also a brief discussion of a number of provisions that were considered by the House and Senate but did not survive the conference committee in the Tax Act; however, there is potential that some of these will be “in play” in the near future. Chapter 2 also includes a brief discussion of new version of Form 1023-EZ.

In Chapter 3 there is discussion of treatment of business income to noncorporate taxpayers, which was one of the highlights in the Tax Act; it allows a for-profit taxpayer who participates in a joint venture with a nonprofit a deduction of 20 percent of the individual's qualified business income in a partnership S corporation or sole proprietorship. There is also included in Chapter 3 a brief discussion of new provisions contained in the Tax Act that affect partnership interest in exchange for services, termination of the partnership interest, and the passive activity loss rules.

In Chapter 6, which involves the choices of structure when engaging in a joint venture, there is a discussion of the impact of the Tax Act and implications on the choice of entity business as well as compensation policy.

In Chapter 8 there is an analysis of the new UBIT rules, including the introduction of the separate business or “silo” legislation. This is an important subject especially because a for-profit corporation is now subject to 21 percent tax on taxable income each year, which reduces the tax on unrelated business taxable income.

In Chapter 10 there is discussion and analysis of the Enterprise Act of 2017, which added a provision allowing private foundations to retain 100 percent of the business under certain conditions. In effect, it benefits Newman's Own Foundation, who owns 100 percent of No Limits LLC, a for-profit company.

In Chapters 12 and 14, the Tax Act is analyzed relative to hospitals and university joint ventures, examining the new 1.4 percent excise tax on the net investment income on endowments for private colleges and universities and the opportunities available to potentially minimize the taxation of unrelated business income. In a joint venture context there is discussion of PLR 201744019, which reexamines the control rules of Rev. Rul. 98-15.

In Chapter 13 there is a brief discussion of the 2018 Omnibus Spending Bill, which provided increases for affordable housing both on the tax and appropriation front, as well as a detailed examination of the new opportunity zone funds, §§ 1400Z-1 and 1400Z-2, with further discussion of the pairing of the opportunity zone incentives with new market tax credits.

In Chapter 16, conservation organizations involved in joint ventures are studied, including an examination of additional rulings and cases that affect the rules. In Chapter 19 the debt restructuring asset protection issues are updated as well.

The bottom line once again: There is no longer one paradigm for joint ventures in face of the Tax Act. Tax-exempt organizations and their for-profit counterparts need to be creative—that is, flexible in forging new paths to create and solve any issues affecting charitable organizations. It is especially important for nonprofits to be able to expand their activities and income stream to support their exempt activities through the use of properly structure joint ventures with other nonprofits or otherwise for-profit investors. The opportunity zone fund may create an extremely attractive alternative; in fact, many socially minded organizations may attempt to be reclassified under § 501(c)(4) (Chapter 2 contains a brief overview of the 501(c)(4) structure compared with 501(c)(3)). It is important to note that prominent philanthropists may attempt to forgo tax exemption, similar to the Chan Zuckerberg Initiative, to accomplish their “charitable” goals. (See § 6.8.)

Acknowledgments

I gratefully acknowledge the assistance of my colleagues at Blank Rome, LLP, who have given freely of their time in the research and review of the manuscript of the Supplement. I appreciate the work of three graduate students in the Georgetown Law Center, Master of Tax Program: Caroline Koo (exempt organizations as accommodating parties in tax shelter transactions, debt financed income, limitation on excess business holdings, private benefit, private inurement, excess benefit transactions; the unrelated business income tax and § 501(c)(4) discussion); Nina Roca (analysis of the impact on UBIT, separate trade or business legislation in the 2017 Tax Act); and Kevin Winters (analysis of the impact of the new opportunity zone fund). In addition, I thank Marcia Seiler Landsburg (debt restructuring). I also thank Ronald Schultz at Alliant Group (current developments regarding conservation organizations).

I am especially indebted to Gayle Forst for her contributions to the healthcare and university joint venture chapters; her analysis of the application of the process for exemption of (c)(4) organizations; and the conversion of status of § 501(c)(3) status to another exempt status, such as (c)(4). And I especially acknowledge Linda Schrader, whose extraordinary kindness and sensitivity have been invaluable in the preparation of the manuscript as has her coordination with the staff of John Wiley and Sons; Linda has been critical to the entire process.

CHAPTER 1Introduction: Joint Ventures Involving Exempt Organizations

§ 1.4 University Joint Ventures

§ 1.5 Low-Income Housing and New Markets Tax Credit Joint Ventures

§ 1.6 Conservation Joint Ventures

§ 1.8 Rev. Rul. 98-15 and Joint Venture Structure (New)

§ 1.10 Ancillary Joint Ventures: Rev. Rul. 2004-51

§ 1.14 The Exempt Organization as a Lender or Ground Lessor

§ 1.15 Partnership Taxation

§ 1.17 Use of a Subsidiary as a Participant in a Joint Venture

§ 1.22 Limitation on Private Foundation's Activities That Limit Excess Business Holdings

§ 1.24 Other Developments

§ 1.4 UNIVERSITY JOINT VENTURES

p. 11. Add the following new paragraph at the end of this section:

There is continued congressional focus on university endowments in light of the soaring cost of tuition and the perceived relatively low rate of financial assistance provided by colleges and universities with substantial endowments. See Chapter 14 for a discussion on policy changes that are being proposed, including imposing an annual payout requirement on endowment funds, among others.

§ 1.5 LOW-INCOME HOUSING AND NEW MARKETS TAX CREDIT JOINT VENTURES

pp. 13–14. Delete the last paragraph on p. 13 and replace with the following:

The CDFI Fund has made 1,032 awards totaling $50.5 billion in allocation authority since the NMTC Program's inception. Through January 2017, CDEs disbursed a total of $42.8 billion in QEI proceeds to more than 4,224 qualified active low-income community businesses (QALICBs).

§ 1.6 CONSERVATION JOINT VENTURES

p. 15. Add the following to the last paragraph of this section:

In January 2014, Treasury and the IRS issued Revenue Procedure 2014-12, 2014-3 I.R.B. 414, which established a safe harbor for federal historic tax credit investments made within a single tier through a master lease pass-through structure. The guidance was issued in response to the Historic Boardwalk decision referenced earlier.

§ 1.8 REV. RUL. 98-15 AND JOINT VENTURE STRUCTURE (NEW)

p. 18. Add the following to the end of footnote 65:

PLR 201744019 (revocation of exemption of a § 501(c)(3) exempt hospital that was not operated exclusively for § 501(c)(3) purposes because it lacked ability to require for-profit manager to operate for charitable purposes.)

§ 1.10 ANCILLARY JOINT VENTURES: REV. RUL. 2004-51

p. 21. Add the following new paragraph to the end of this section:

In section 4.10, there is an analysis of a virtual joint venture hypothetical, as to which a similar rationale should apply in a case in which the IRS proposes the revocation of an existing 501(c)(3) organization, alleging impermissible private benefit following an examination of its relationship with a for-profit entity. This commentator believes that the rationale should apply, notwithstanding the fact that no formal joint venture arrangement exists between the parties.

§ 1.14 THE EXEMPT ORGANIZATION AS A LENDER OR GROUND LESSOR

p. 28. Insert the following new paragraph at the end of this section:

The Internal Revenue Service recently issued final guidance for private foundations that updates examples that relate to program-related investments that pass muster under § 4944(c). The rules (T.D. 9762) provide changes and examples that were first provided in the 2012 Proposed Regulations. See § 6.5(b) for a detailed discussion of the new examples.

In April 2016 the IRS issued final guidance for private foundations that updates a number of examples of program-related investments that won't trigger excise taxes. Final Rules (T.D. 9762) illustrate changes to the examples provided in the 2012 Proposed Rules. In one change involving Example 11, a private foundation that invested in a drug company subsidiary developing a vaccine for disease predominantly affecting poor people in developing countries recognizes that, in addition to distributing the vaccine at affordable prices, the subsidiary is allowed to sell the vaccine to those who can afford it at fair market value prices. In Chapter 6, each of the examples and its revised Treasury guidelines are set forth.

§ 1.15 PARTNERSHIP TAXATION

(a) Overview

p. 30. Add the following new paragraph to the end of this subsection:

In the Bipartisan Budget Act of 2015, the partnership audit rules have been revised, the effect of which is that adjustments of income, gain, loss, deduction, or credit are to be determined at the partnership level and the taxes attributable thereto will be assessed and collected at the partnership level. The new rules are effective beginning taxable years after December 31, 2018, although small partnerships may opt out before then. See Chapter 3 for a discussion of the application of the new rules.

(b) Bargain Sale Including “Like Kind” Exchange

p. 30. Add the following to the end of footnote 101:

See discussions regarding contribution of LLC/partnership interests to charity in § 2.11(f) (new), infra, and § 3.11, Sale or Other Disposition of Assets or Interests.

§ 1.17 USE OF A SUBSIDIARY AS A PARTICIPANT IN A JOINT VENTURE

p. 34. Add the following paragraph after the first full paragraph on this page:

In September 2015, National Geographic Society formed a joint venture with 21st Century Fox, called the National Geographic Partners, a for-profit media joint venture. In this new venture, Fox contributed a substantial amount of cash to National Geographic, which increased its endowment to nearly $1 billion, in exchange for the contribution of significant assets, including its television channels and related digital and social media platforms. See § 6.3(b)(iv) for an analysis of the structure.

§ 1.22 LIMITATION ON PRIVATE FOUNDATION'S ACTIVITIES THAT LIMIT EXCESS BUSINESS HOLDINGS

p. 45. Add the following footnote to the end of this section:

163.1See discussion regarding the contribution of LLC/partnership interests to charity in § 2.11(f).

§ 1.24 OTHER DEVELOPMENTS

p. 47. Add the following as footnote 175 to the last sentence of this section:

175In Burwell v. Hobby Lobby Stores, Inc., the Supreme Court cited p. 555 in this book, which described Google.org advancing its charitable goals while operating as a for-profit corporation. See footnote 24 of the Hobby Lobby decision, 134 S.Ct. 2751 (2014). The court recognized that while operating as a for-profit corporation, it is able to invest in for-profit endeavors, do lobbying, and tap Google's innovative technology and workforce. It acknowledged that states have increasingly adopted laws formally recognizing hybrid corporate forms.

CHAPTER 2Taxation of Charitable Organizations

§ 2.1 Introduction (Revised)

§ 2.2 Categories of Exempt Organizations

§ 2.3 § 501(c)(3) Organizations: Statutory Requirements (Revised)

§ 2.6 Application for Exemption (Revised)

§ 2.7 Governance (Revised)

§ 2.8 Form 990: Reporting and Disclosure Requirements

§ 2.10 The IRS Audit

§ 2.11 Charitable Contributions

§ 2.1 INTRODUCTION (REVISED)

p. 50. Insert quotation marks around IRC on line 8 and add a comma after contributions and churches in footnote 2.

p. 52. Insert the following after the last paragraph of this section:

In the 2017 Tax Act (Pub. L. No. 115-97) (the “Tax Act”), the following changes affect tax exempt organizations:

New 2017 Legislation

Charitable contributions are likely to decline as a result of the lowering of the individual income tax brackets (a maximum rate of 37 percent) while doubling of the standard deduction. These rates and the standard deduction sunset after December 31, 2025. It is projected that only 5 percent of taxpayers will have sufficient itemized deductions that exceed the standard deduction that will enable them to continue to claim a charitable contribution deduction which may curtail charitable giving. Moreover, the estate tax exemption was doubled so that individuals now have $11 million of exemption and married couples able to exclude $22.4 million from their estate tax. This provision also sunsets after December 31, 2025. Finally, there is a reduction in the C Corporation rates to 21 percent, which is a permanent change. It is important to note that C Corps have been the largest investor in joint ventures including the low income house tax credit and new market tax credits. (See

Chapter 13

.)

The AGI annual limitation has been increased to 60 percent for cash contributions; the provision also sunsets after December 31, 2025. There is obvious concern that major donors are likely to be the only taxpayers in a position to give away up to 60 percent of their AGI in a given year. In addition, the rule that requires contemporary written acknowledgment (§ 170(f)(8)(D)) no longer applies if the donee organization files a return that includes similar content. See § 2.11(f). The charitable sector benefits because they have been pressured by donors to fill forms out in lieu of providing a standard acknowledgement. The proposed regulations required the reporting of the donors tax ID numbers/FNS, charities were concerned that it could lead to theft.

Code § 4960 proposes a new 21 percent excise tax on tax exempt organizations (modeled on § 162(m)) for (i) any “remuneration” paid to a covered employee that exceeds $1 million (whether or not such amounts are reasonable), and (ii) on “excess parachute payments” paid to a covered person under a separation agreement (i.e., severance payments that exceed 3 times the person's annual compensation averaged over the past five years). In this regard “covered employees” include the top 5 most highly compensated employees (or former employees) from the tax year or anyone who was a covered employee from any preceding taxable year beginning in 2017. “Remuneration” is defined as “all wages” under § 3401(a), excluding Roth contributions, paid by a tax exempt organization or related party with respect to employment of the covered person. See § 5.4(b).

CAVEAT

The intermediate sanctions and excess benefit rules of Code § 4958 still apply.

CAVEAT

The Act extends these new executive compensation limitations to tax exempts not limited to 501(c)(3)s or 501(c)(4)s, but including businesses, federal and state and local entities under § 115(1), and political organizations. Unlike the intermediate sanctions excise tax, § 4960 taxes applies to the organization itself not covered employee or organizational manger.

The excess tax applies to deferred compensation remuneration, which is viewed as paid where it is no longer subject to a substantial risk of forfeiture under § 457(f)(3)(B). Thus amounts that are “vested” but not yet received by a covered employee will be subject to tax.5.1

There is a new unrelated business income tax (UBIT) on transportation, parking, and gym fringe benefits unless the amounts are deductible under Code § 274 because they are treated as part of the employee's taxable compensation.

The unrelated business income tax rate is now 21 percent, which will provide relief to many exempt organizations, which have been paying as much as 35 percent on unrelated taxable income. However, this rate reduction may be offset by the new rule that net operating losses from one activity may no longer offset income from another activity. Tax exempt organizations will need to calculate tax on each unrelated business separately.

QUERY

May all “investment” activities be treated as one activity for offsetting purposes? Will each of the gains and losses have to be separately stated? Treasury will need to publish regulations to resolve this issue.

There is now a new 1.4 percent tax on net investment income of certain colleges and universities defined as “applicable educational institutions” (i) that have at least 500 tuition-paying students, (ii) that have more than 50 percent of tuition-paying students located in the United States, and (iii) whose assets aggregated at fair market value are at least $500,000 per student at the end of the preceding taxable year. See §14.1. Related organizations to colleges and universities are required to have their assets and net income considered when determining whether the institution meets the asset-per-student threshold and for purposes for determining net investment income.

CAVEAT

The new Bipartisan Budget Act of 2018 clarifies the Tax Act to provide that the “at least 500” and “more than 50 percent” of students tests both refer only to tuition-paying students.

CAVEAT

This new excise tax is estimated to raise approximately $1.8 billion in revenue over ten years and affect only about 35 institutions.

A related organization will include one in which the educational institution (a) controls or is controlled by (b) one or more persons who control the institution or (c) are supported organizations or supporting organizations with respect to the institution. The foregoing rules will require Treasury Regulations to clarify the scope of the new provision.

Section 170(l) is amended to eliminate the special rule and now denies deductions for college booster seats including season tickets.

Provisions that did not survive the Tax Act.

It is important to examine a number of provisions that were considered by the House and Senate but that did not survive the Conference Committee. The following provisions may well be reconsidered next time extensive tax legislation is considered by Congress. Beware of the potential that some, if not all, of these provisions will be “in play” in the near future.

In the application of the initial tax on a disqualified person pursuant to the intermediate sanctions rules, the rebuttable presumption of reasonableness would have been eliminated. (See § 5.4(c)(ii).) Procedures would be promulgated by the IRS to establish that an organization has performed minimum standards of due diligence (essentially the same as those that pertain in connection with the previously described presumption) with respect to a transaction or other arrangement involving a disqualified person (proposed IRC § 4958(d)(3)). The existing rule by which an organization manager's participation in a transaction ordinarily is not “knowing” participation for purposes of the intermediate sanctions rules if the manager relied on professional advice would be eliminated (proposed IRC § 4958(g)). The definition of a disqualified person, for purposes of the intermediate sanctions rules, would be expanded to include investment advisors and athletic coaches at private educational institutions (see proposed IRC § 4958(f)(1)(G), proposed revision of IRC § 4958(f)(8)(B)).

5.2

The private foundation's excise tax would be reduced to a single rate of 1.4 percent (revised IRC § 4940(a), proposed repeal of IRC § 4940(e)). Also a rule would be enacted stating that an entity cannot be a private operating foundation as an art museum unless the museum is open during normal business hours to the public for at least 1,000 hours annually (proposed IRC § 4942(j(6)).

A sale or licensing by an exempt organization of the entity's name or logo (including any related trademark or copyright) would be treated as an unrelated business regularly carried on (proposed IRC §§ 512(b)(20), 513(k)). Income derived from such licensing would be included in the organization's gross unrelated business income, notwithstanding the exclusion for certain types of passive income (including other forms of royalties). See § 8.5(d). The unrelated business income tax would not apply to research limited to publicly available research (see IRC § 512(b)(9)). The application of UBIT to state and local retirement plans (proposed IRC § 511(d)) would be clarified.

Charitable organizations would be allowed to make statements relating to political campaigns in the ordinary course of program activities, where the expenses are de minimis (proposed IRC § 501(s)) a very controversial proposal opposed by both the Independent Sector and the Council on Foundations.

The tax exemption for professional sports leagues (IRC § 501(c)(6)) would be repealed.

The standard mileage rate for the use of an automobile for charitable purposes would be adjusted to take into account the variable costs of operating the vehicle rather than the existing law's 14 cents–per–mile deduction.

Additional reporting requirements for sponsoring organizations of donor advised funds would be enacted, consisting of the average amount of grants expressed as a percentage of asset value and a statement as to whether the organization has a policy as to the frequency and minimum level of distributions (proposed IRC § 6033(k)(4)).

§ 2.2 CATEGORIES OF EXEMPT ORGANIZATIONS

p. 52. Insert a comma after plans) on line 3 of the first paragraph.

p. 52. Delete the last two sentences in footnote 9 and replace with the following:

According to the National Center for Charitable Statistics, there were 1,202,719 §501(c)(3) organizations as of April 2016. http://nccs.urban.org/statistics/quickfacts.cfm.

p. 54. Delete the last sentence in this subsection and insert the following:

See § 2.3 and subsequent sections for analysis and discussion of these rules. The following presents a brief comparison of § 501(c)(3) and § 501(c)(4) organizations, social welfare organizations that are being formed with increasing frequency.

(a) § 501(c)(4) Organizations: A Brief Overview

Section 501(c)(4) organizations have greater organizational and operational flexibility than § 501(c)(3) organizations. Their numbers have substantially increased since the Supreme Court Citizens United case,22.1 with further growth anticipated as a result of the 2017 increase in the standard deduction. See § 2.6(c). In light of changes in the Tax Act reducing the numbers of taxpayers eligible to claim a deduction for contributions to § 501(c)(3) organizations, there is an expectation of increased donations to § 501(c)(4) organizations that can, as described later, engage in unlimited lobbying and a certain amount of political activity on behalf of candidates and issues they support.

Section 501(c)(4) provides tax exemption for civic organizations and local associations of employees that are not organized and operated for profit and are operated exclusively for the promotion of social welfare.22.2 Like § 501(c)(3) organizations, the earnings of § 501(c)(4) entities cannot inure to the benefit of any private shareholder or individual,22.3 and the § 4958 excise tax is imposed on excess benefit transactions between a disqualified person and § 501(c)(4) organization.22.4 See § 5.4.

Contributions to § 501(c)(4) organizations are not deductible as charitable contributions under § 170(c),22.5 although dues or contributions to § 501(c)(4) organizations may be deductible as business expenses under § 162.22.6

A § 501(c)(4) organization must be operated exclusively for the promotion of social welfare.22.7 However, regulations under § 501(c)(4) have defined “exclusively” to mean “primarily” engaged in the promotion of social welfare.22.8 Accordingly, unlike the absolute prohibition on political activity by § 501(c)(3) organizations, a § 501(c)(4) organization may engage in political activity provided that the organization's political activity does not constitute its primary activity. If a § 501(c)(4) organization's political activities exceed this restriction, the organization may be subject to a tax on expenditures made for political activities under § 527(f).22.9

Neither the IRC nor the regulations contain a numerical definition of “primarily.” Some practitioners advise § 501(c)(4) organizations that “primarily” may be interpreted as 51 percent of their total expenditures, in effect allowing § 501(c)(4)s to allocate up to 49 percent of total expenditures to political activity.22.10 Other practitioners take a more conservative approach to minimize risk of a challenge to tax exemption or imposition of excise taxes and advise limiting political activity to less than 40 percent to political activity.

Section 501(c)(4) organizations may also engage in an unlimited amount of lobbying, provided that the lobbying is related to the organization's exempt purpose to promote social welfare.22.11 Consequently, an organization whose substantial lobbying activities would cause it to be characterized as an action organization under § 501(c)(3), and therefore disqualified as a § 501(c)(3), may nonetheless qualify for exemption under § 501(c)(4).22.12

Social welfare organizations must file Form 8976 to notify the IRS of its intent to operate as a § 501(c)(4) organization within 60 days of formation.22.13 In addition, if an entity seeks a determination letter from the IRS recognizing its exempt status, it can elect to file Form 1024-A.22.14 Section 501(c)(4) organizations are also subject to annual filing requirements using Form 990 or 990EZ.22.15 See §§ 2.6(c) and 2.8.

As a general rule, § 501(c)(3) organizations could qualify under § 501(c)(4), whereas not all § 501(c)(4) organizations would qualify as a § 501(c)(3) under the more stringent rules placed on § 501(c)(3) organizations.22.16

§ 2.3 § 501(C)(3) ORGANIZATIONS: STATUTORY REQUIREMENTS (REVISED)

(a) Organizational Test

(ii) Dedication of Assets. p. 57. In footnote 36, change brackets to parentheses.

(b) Operational Test

p. 57. In footnote 38, change note 40 to note 37.

p. 58. Add the following to the end of footnote 42:

The IRS will revoke the exempt status of an organization that conducts no activities at all. See PLR 201623011.

(i) Operating Exclusively for Exempt Purposes. p. 59. The second paragraph under this section is a continuation of the first paragraph and should not be indented.

p. 60. The first full paragraph on this page is a continuation of the previous paragraph and should not be indented.

p. 61. Delete the citation in footnote 65 and replace with the following:

Kentucky Bar Foundation, 78 T.C. at 930.

(ii) Prohibition against Inurement.  p. 62. Delete the citation in footnote 72 and replace with the following:

American Campaign Academy, 92 T.C. at 1068.

p. 63. Combine footnotes 74 and 75 into one footnote 74.

§ 2.6 APPLICATION FOR EXEMPTION (REVISED)

(a) Individual Organizations

p. 118. Before the first paragraph of (a) Individual Organizations, insert the following:

(i) General Procedure

(A) INDIVIDUAL ORGANIZATIONS

p. 118. Delete the citation in footnote 396 and replace with the following:

Rev. Proc. 2018-5, 2018-1 IRB ___. Note that the information contained in Rev. Proc. 2018-15 is updated annually in January.

pp. 118–119. Delete second and third sentences of the first paragraph under (a) and substitute with the following:

Organizations seeking exemption under § 501(c)(3) must submit a completed Form 1023 to Internal Revenue Service, Attention: EO Determination Letters, Stop 31, P.O. Box 12192, Covington, KY 41012-0192 if by mail, or to Internal Revenue Service, Attention: EO Determination Letters, Stop 31, 201 West Rivercenter Boulevard, Covington, KY 41011. The user fee structure has been simplified and is now $600 for recognition of exemption under § 501 using Form 1023 and Form 1024 and 1024-A (see § 2.6(c)). Smaller organizations are eligible file Form 1023-EZ electronically at www.pay.gov along with a $275 user fee.

p. 119. Insert the following before the first full paragraph on this page:

NOTE

As of January 2018, IRS has issued revised Forms 1023, Form 2848 (Power of Attorney), Form 1023-EZ (which includes a short summary of an organization's exempt purposes), as well as Form 1024-A to be used only by organizations seeking exemption under § 501(c)(4). (See § 2.6(c).) It is important to use the newest version of these forms because the IRS has indicated that it will return applications on the old forms and ask that the applicant resubmit using the current version. Specifically, the current version of Form 1023 is dated December 2017 and Form 1024 is dated January 2018. Form 8718, User Fee for Exempt Organization Determination Letter Request should be submitted with exemption applications other than those using Forms 1023 and 1023-EZ.

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